Why isn't this object becoming transparent in the render?
You have set your transparency to Mask. To quote the Blender Manual:


  This option simply masks the Background. It uses the alpha channel to
  mix the color of each pixel on the active object plane with the color
  of the corresponding background pixel, according to the alpha channel
  of the pixel. Thus for alpha = 1, the object color is seen – the
  object is completely opaque; but if alpha = 0, only the background is
  seen – the object is transparent (but note that any other object
  behind the active object disappears).


Essentially, any object behind a 'Mask' object will not be visible.
Instead, set the transparency type to Z Transparency or Raytrace: